On CSFB's tail, DB enters new asset class in Mex

Before the ink on a rival prospectus could dry, Deutsche Bank Securities registered with Mexican regulators a US$250 million shelf for local deals backed by foreign bonds. This follows a similar registration by Credit Suisse First Boston and Inversora Bursatil in an asset class that has yet to debut (see ASR 3/29, p.22). While they share a sector, the planned deals have some significant differences.

The CSFB-Inversora transaction is backed by one particular asset, a 10.375% 2009 bond issued by Mexico. Deutsche, in contrast, will draw from a much wider scope of bonds. Its program is open to any cross-border deals issued by Mexico and Mexican state companies, namely power giant Compania Federal de Electricidad (CFE) and oil company PEMEX.

In addition, CSFB and Inversora have denominated their program only in pesos, making cross-currency swaps an essential part of the structure. Deutsche has left open the option of issuing in dollars or pesos domestically.

For the peso issuance, Standard & Poor's rated the Deutsche program mxAAA' on the national scale. Fitch Ratings and Moody's Investors Service, meanwhile, gave the CSFB-Inversora deal AA+(mex)' and Aa2.mx', respectively. Since the collateral of both transactions is rated triple-A on the national scale, the ratings discrepancy appears to stem from divergent ways of viewing currency-swap risk.

Fitch analyst Rogelio Arguelles said that the exchange-rate risk associated with the CSFB-Inversora deal's currency swaps, however minor, was enough to keep the deal shy of a top-notch rating.

Meanwhile, S&P said in its report that a triple-A was justified, as long as the Deutsche unit designated to provide the derivative transaction under each tranche was rated A-' or higher on the global scale. Fitch felt the swap risk was still there, even though CSFB - the counterparty in the CSFB-Inversora deal - is rated AA-' on the global scale.

Any entity rated over the sovereign's global currency ratings of Baa2'/ BBB-'/'BBB-' in theory rates triple-A on Mexico's national scale.

Collateral for the deal is comprised of receivables stemming from the executed sales of houses constructed by Geo. The underlying pool is revolving, and the maturity is seven years. The obligors in the deal are government entities, such as housing agency Infonavit, and specialized housing finance companies known as Sofols. The bond is a bullet.

Among the deal's enhancement is a surety bond proved by Afianzadora ING Comercial America, which equals 30% of the total volume issued. S&P rates the ING unit mxAAA' on the national scale. The impeccable performance of previous issues by Geo also weighed in the current transaction's favor. The deal came off a Ps500 million (US$44.7 million) shelf registered earlier this year.

Government credit agency Fonacot also returned to the market toward the close of the first quarter. Aiming to push out its debt profile, the issuer priced a Ps1 billion (US$89.4 million) deal at a nominal rate of 7.9%, a reasonable spread over the 6.99% rate on its prior deal, given the longer maturity. The latest transaction matures in November 2005, a full eight months longer than the first one (see ASR 10/6, p.24). Thanks largely to Fonacot's implicit support from the government and 10% overcollateralization, S&P and Fitch rated the deal triple-A on the national scale.

In the realm of sub-sovereign credits, the state of Huixquilucan is eyeing the market, but is apparently in no hurry to issue. Boutique investment bank Protego Asesores is rumored to have a mandate for a deal that would probably end up drawing on locally generated assets, such as property taxes, as opposed to the more traditional federal co-participation revenues.

Lending fuel to issuance talk, Moody's assigned Huixquilucan a national scale rating of Baa1.mx' only a couple of weeks ago. S&P has rated the state mxBBB+' on the national scale since mid-2003. The state, however, is not in urgent need of fresh funds and is biding its time while it automates tax collection, sources said. Huixquilucan is hoping that a more efficient system will translate into better issuance terms down the road.

The state has turned in an erratic performance over the last few years, according to Moody's. Steep deficits and a habit of paying suppliers late weigh on its credit standing. Its revenue profile, on the other hand, is a strong positive. While most Mexican states are highly dependent on the federal participation revenues meted out by the central government, about 60% of Huixquilucan's revenues are generated locally. The municipality lies on the western fringe of the Federal District and is home to a relatively affluent population.

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